Supplementary memorandum submitted by
the Department of Energy and Climate Change
NOTE FOR
THE ENERGY
AND CLIMATE
CHANGE COMMITTEE
ON THE
CHANGES TO
THE NORTH
SEA FISCAL
REGIME INCLUDED
IN BUDGET
2009
The following material has been agreed with
HMT and HMRC.
NORTH SEA
FISCAL REGIME
1. The Government remains fully committed
to maximising the economic recovery of the UK's oil and gas resources
and recognises the vital role that the oil and gas industry plays
in contributing to the UK's energy security of supply. It is also
fully aware of its wider contributions to the UK economy through
employment, impact on the balance of trade and the skills, expertise
and cutting edge research and development it engenders.
2. Following a consultation "Supporting
Investment" launched at the 2008 Pre-Budget Report, Budget
2009 announced a further package of reforms to the North Sea fiscal
regime, building on those announced in Budget 2008, to support
the investment necessary to realise the potential of the UK Continental
Shelf (UKCS). The measures, which are designed to encourage the
economic recovery of the UK's oil and gas reserves, will be legislated
in Finance Bill 2009.
3. Central to this package is the introduction
of a new "Field Allowance" (described in the consultation
document as a "value allowance"). This will give incentives
to encourage investment in small or technically challenging fields,
which could assist in unlocking around 2 billion barrels of the
UK's remaining oil and gas reserves. It will be targeted at new
small fields, with an allowance set at £75 million, and at
challenging new High Pressure High Temperature or Heavy Oil fields,
with the allowance set at £800 million. The introduction
of the Field Allowance marks a significant change to the approach
of the North Sea Fiscal Regime. The Government believes it has
the potential to make an important contribution to the competitiveness
and attractiveness of investments in the UKCS. Industry also made
a case for the Field Allowance to extend to some other types of
development. Whilst the Government was not convinced of their
arguments on this occasion, it of course remains willing to discuss
such matters further in the future if a compelling case can be
made.
4. The package also includes measures to
assist asset trades and give companies the certainty and stability
they need to underpin investment. In brief, in addition to the
new Field Allowance, the package of reforms announced at Budget
comprises:
(a) Changes to the chargeable gains regime within
the North Sea ring-fence to remove chargeable gains entirely from
licence swaps and making gains exempt where disposal proceeds
from ring fence assets are reinvested within the UKCS.
(b) Changes to the North Sea fiscal regime to
remove potential barriers to projects that re-use North Sea infrastructure
for non-ring-fenced purposes including gas storage, carbon capture
and storage and wind energy.
(c) Amending the petroleum revenue tax (PRT)
regime to ensure that companies whose production licences have
expired are still able to access PRT decommissioning relief where
appropriate.
(d) Changes to the PRT regime to reduce the administrative
burden it imposes, simplify compliance and repeal obsolete legislation.
Further details of these changes are set out
in the attached Budget Notes. Legislation to enact these measures
will be published as part of Finance Bill 2009.
5. Discussions with Industry on the North
Sea regime have been ongoing since 2005. The Government thanks
all those in Industry for the efforts they have made in engaging
fully and constructively with Government on these issues over
this extended period. There is no stated "next step"
for the discussions but that should certainly not be taken as
a sign that the Government considers that the process of engagement
is at an end. The Government will continue to engage with stakeholders
wherever necessary to ensure that the North Sea fiscal regime
continues to help deliver the best possible future for the UKCS.
In particular, officials from both DECC and HMT/HMRC have been
asked to look further into the question of post tax decommissioning
security and to discuss this complex area with Industry in the
coming months.
PREVENTING ACCELERATED
DECOMMISSIONING RELIEF
6. Budget 2009 also announced that, in order
to close down a tax avoidance scheme, the Government was amending
with immediate effect the rules providing tax relief for the decommissioning
costs of North Sea installations and infrastructure. The changes
to the North Sea fiscal regime will ensure companies cannot access
tax relief for decommissioning oil and gas infrastructure years
in advance of the decommissioning activity actually being carried
out. As originally intended, companies will in future be able
to claim tax relief for decommissioning costs only for the accounting
period in which the work is actually carried out. Draft legislation
and Explanatory Notes in relation to the changes were published
alongside the Budget.
TAX RELIEF
FOR COST
OF CUSHION
GAS
7. Following calls for clarification of
the tax treatment of cushion gas in gas storage facilities, the
Budget also confirmed that, after a full and detailed consideration
of the established case law, and after taking advice from leading
Counsel, HMRC accept that purchased cushion gas does comprise
plant for the purposes of plant and machinery capital allowances
and hence expenditure on cushion gas will be eligible for capital
allowances. HMRC have written separately to individual operators,
and to the Gas Storage Operators Group, to confirm this treatment.
This announcement will give the industry the clarity and certainty
they need to bring forward gas storage projects to meet the UK's
gas storage requirements which will increase security of supply
and help smooth energy price fluctuations.
April 2009
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